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Small Investment Ideas: How to Invest with Little Money

Phil Town
Phil Town

While investing has historically been left up to the big guys at big banks managing big money, that’s not the only way to invest today. Investing is accessible to everyone with every size bank account. There are plenty of small investment ideas for as little as $20 or as much as $1000.

Everyone needs to start somewhere. In fact, if you’re just beginning your investing journey, it’s a good practice to start small.

When it comes to money, “small” means something different to everyone, so I’ll walk you through a few small investment ideas based on your budget. Over time, even small investments can reap big returns. You may be surprised to learn just how easy it is.

With the right strategy, starting small can be an advantage rather than a shackle. Read on for how to invest in stocks for beginners with little money.

A Strategy for Making Small Investments

Before we dive in, it’s important to know what investing is in the first place and how to get the greatest return on your investments.

Whether you’re investing with small money or big money, you will follow the same basic investing strategy. The best way to invest $1000, $500, or even $20 is the best way to invest $10,000. Investing is always investing.

The value of the investment is always the top priority. You first want to consider how much the thing you want to invest in is actually worth. What is its real value? Then, what is the price? If the price is less than the value, then you’re off to a good start.

But let’s dive into a couple of other factors at play when you’re figuring our your small investment strategy.

Determine The Best Type of Small Investment for You

There are lots of different types of investments you can make, but not all investments are great for small amounts of money. For example, you can’t invest in real estate with $500, and even though you can invest $500 in Exchange Traded Funds and bonds, it doesn’t mean you should. 

If you put $500 in ETFs or mutual funds each year for the next 30 years and get the long-term historical return of 7%, all you’ll have in 30 years is $45,000 (less fees for mutual funds). 

Take bonds next; with a historical return of 5% over the next 30 years, your investment will grow to around $35,000. Bonds may be the safest way to invest, but how safe is a retirement of $35,000?

If you ask yourself, “What will make me the most money?” The answer is investing in stocks. 

Later, I’ll show you how to calculate how much you can have in 30 years if you invest $500 in the stock market. Hint: it’s a lot more than the other options.

But first, let’s talk a bit about the number one thing I hear beginners say that holds them back from making even the smallest investment: fear of the stock market.

Overcome Your Fears of Investing in the Stock Market

The stock market can be scary and risky if you don’t know what you’re doing, but one of the key principles of Rule #1 investing is to invest only in businesses you understand. You can overcome the fear and risk of the stock market if you understand what you are investing in. 

Putting money into things you don’t understand is NOT investing. It’s SPECULATION and speculating stocks is equatable to gambling. 

Frankly, that’s the way most retirement accounts are managed. The account managers are speculating on someone being willing to pay more for a stock tomorrow than you paid today. 

This is likely to be true in the long run, but you have to ask yourself, “How long is the long run?” and “How much more will you make?”

That’s why you should consider learning how to invest (real investing, not speculation). Real investing is when you buy wonderful businesses you understand at undervalued prices that guarantee great returns.

If you do this, you will be able to overcome your fear of investing and set yourself up for success. 

Bottom Line: “Risk comes from not knowing what you are doing.” – Warren Buffett

Understand How Small Investments Pay Off in the Long Run

You’re here, so I’m preaching to the choir, but I can’t stress enough how important it is to just start. It is better to start with small investments and add to them over time than to wait and lose out on great returns as well as the power of compounding interest.

Every day you don’t invest you are losing out on compound interest. With compound interest, when your money grows, its growth is also invested. 

There’s a tool I like to use called The Rule of 72 that does a good job of explaining the power of compounding interest and will show you just how fast your money can double. This is how even small investments can pay big dividends. 

What Can I Invest in to Make Money Fast?

The answer to this question might disappoint you. Investing and making money fast go together about as well as oil and water… 

If you used the rule of 72 I mentioned above, you’ll see that it will probably take a few years for your money to double, but if you’re investing the Rule #1 way, which is for the long term, a few years is nothing. 

If you want to make money fast, go to Las Vegas, bet everything on black, and hope you come out on top. When you’re taking risks just to make money fast, you’re not investing, you’re gambling.

Remember, we don’t gamble with our money here. We buy wonderful companies at attractive prices.

So, I propose a new question: 

What Can I Invest in to Make More Money?

If you really want to learn how to invest, it takes a good amount of due diligence and patience but the long-term payoff is worth it. By following smart investment practices that have made people like Warren Buffett extremely wealthy, you may not make money fast but you will make more of it.

Warren Buffett started with a small amount of money too, and he turned it into $30 billion. This goes to show that it isn’t about the money you have, it’s about the knowledge you have. 

That’s good news if all you have to invest is a small amount. It means there are no real barriers to getting rich if you’re willing to work hard and learn. When you know how to invest like the richest people in the world, you won’t ever have to risk losing all of your money to do it. This isn’t Vegas.  

So, what are the best small investment ideas to invest $1,000, $500, or $20? 

Let’s break it down.

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How to Invest $1,000

Alright, let’s get specific with small investment ideas for $1000. We will look to the experts to understand the best way to invest $1000 and make a promise to ourselves to actually invest the money. Even if you don’t have $1000 to invest yet, these strategies will help you learn how to invest with little money, whatever the amount.

Make A Promise to Yourself

You have a small amount of money to invest, but are you really ready to put your money where your mouth is? 

If so, make a promise to yourself that you are going to do your due diligence to find the right companies, buy them at attractive prices, and double your $1000 over the next 5 years. 

Once you have made that commitment, you are ready to move on to the next step. 

Research The Company

The key thing to understand is that we make money by buying wonderful companies and buying them on sale. So, what makes a wonderful company? 

Charlie Munger, partner of Warren Buffett, says that there are four things you’ve got to focus on when you invest your $1000, or any amount of money, in a company:

Number one, be sure you’re capable of understanding the business that you’re getting into.

Number two, be sure that this business has this thing that we call a moat: something deeply embedded in it that protects it from the competition.

Number three, make sure that the management team is made up of people who share your values, have integrity, and are talented.

And finally, make sure you buy it on sale. “Sale” means at a purchase price with a margin of safety.

I call these the 4 Ms. If you know the Meaning behind the company, it has a Moat to protect it from competition, the Management is trustworthy, and you can buy it with a Margin of safety that will give you 15% returns year over year, it is a great investment. 

View this post on Instagram A post shared by Phil Town (@ruleoneinvesting) on Aug 9, 2020 at 6:03pm PDT

What does this mean for a $1000 investment?

It means you’ll have $1150 after one year, but thanks to compounding interest, after 5 years, you’ll have doubled your money. This is without adding any more money on top of your initial investment. 

When it comes to making great investments, it’s really not about the amount you’re starting with, it’s about the strategy you’re using. The right strategy is going to continue to grow that initial investment over time. Even if you’re starting with a small amount of money, if you’re making an average of 15% returns year over year, you’re doing good.

Avoid the Temptation to Diversify

Contrary to popular belief, you don’t need to diversify when you invest in a few wonderful companies that meet the above criteria. Diversification is what speculators like to do to safeguard their stock picks. As I mentioned above, you can’t get the same great return on your investment from other types of investments. ETFs, mutual funds, and bonds are all a waste of your time and money if you want to actually see your investment grow. 

Stick to a few wonderful companies and you’ll be better off. 

Here’s a short video that answers more questions about small investing.

How to Invest $500

Now, you may be thinking, “$1000 is a lot of money; what about $500?” If you’re asking yourself this question, remember: the best way to invest $500 is the best way to invest $1000 is the best way to invest $10,000.

It’s not the amount of money that makes a great investment, it’s the strategy. However, starting with $500 does have its perks.

Consider A Little More Risk

When you’re investing a small amount you can be more aggressive. If you start with $500, you have the luxury to take some chances.

You can afford to take more risk because if you lose, while it may hurt a little, it’s not tragic. You lost $500. You can make that money back in no time and take another shot.

More risk = more reward, but that doesn’t mean you should throw away everything you learned above. You can minimize your risk and maximize your reward by investing the Rule #1 way: buy wonderful businesses on sale. Yes, even if you’re only investing with $500. This initial investment, while small, will help you get more comfortable with “the risk” of investing.

Utilize the Magic of Compound Interest

Don’t stop there. If you can continue to invest $500 per year the Rule #1 way, you can watch your initial investment grow even more. 

It’s the power of compounding interest that can make you rich even with little money. 

Let’s take a look at this example: If you started out with $15,000 saved and contributed an additional $500 per year for 30 years, you could end up with $1.2 million when you’re ready to retire. See how I calculated this using my free retirement calculator below. 

Plug in your own values using how much you have to invest today and how much you can contribute to your portfolio each year to calculate how much you could have for retirement.  

(This screenshot from my free retirement calculator shows how much you’d have if you invested $500 using Rule #1)

How to Invest $20

Maybe your idea of a small investment is closer to the $20 range. That’s totally fine – baby steps are better than no progress at all. 

The fact that you’re even thinking about investing when you only have $20 means you’re in the right mindset. One of the best things that you can do to begin investing when you have very little money is to form good habits. Practice these good habits with $20 and you’ll have a rich future ahead of you.

Don’t Wait

You can start forming good habits by taking money out to invest as soon as you receive your paycheck.

Most often, people end up taking the exact opposite approach, waiting to see how much money they have left over before they invest. However, if you wait to see how much money you have left over before investing it, the number will almost always be a big ‘ol zero.

Instead, invest your $20 straight out of your paycheck and watch it work for you. Setting aside money to invest right away, even as little as $20, can become a natural, nearly subconscious act when you do it regularly. 

Don’t Save It

Saving isn’t inherently bad, but if you want to get a great return on your money and create generational wealth, it won’t happen by saving it. 

Most Saving accounts only offer 2% interest (if you’re lucky), which means you can hardly beat inflation, which means your money won’t really grow at all. 

Think of your investment account as your saving account and you’ll be well on your way to “saving” $10,000 this year.

 View this post on Instagram A post shared by Phil Town (@ruleoneinvesting) on May 19, 2020 at 2:05pm PDT

Avoid Money Traps 

It’s simply too easy to spend money rather than investing it if you make spending it an option. Things like fancy cars, big houses, and weekend nights out can mean you have less to invest. Avoid these money traps and others and focus on the promise you made to yourself. Take your $20 and invest it in a great company rather than its fancy product.

Use it as a Stepping Stone

No investment is too small. Small investments such as $20 still grow, especially when you invest $20 on a regular schedule. That’s really all it takes. Not only will your $20 investment grow, but it will also help you conquer your fear and keep your promise to yourself. 

How to Invest With Little Money or No Money

By now, you should know you can start investing even with a small amount of money. Everyone needs to start somewhere. 

When I first learned to invest, I was working as a Grand Canyon river guide making a whopping $4,000 a year—that’s not a typo. I lived out of a tent and all of my belongings could fit into a small duffle bag. I know what it’s like to try and invest when the price of a single share in many companies is more than you have to spend.

I am living and breathing PROOF that investing is something anyone can succeed at with the right approach, no matter how much or how little money they are starting with.

When you don’t have any money (and you’re trying to change that) you have to step out on a limb. Take some chances, put what money you do have to use, and start climbing your way up. Again, everyone has to start from somewhere, and there’s no such thing as having too little to invest.

Benefits of Investing With Little Money

There are advantages to investing with small amounts of money as well. With the right approach and by taking the right risks (safe ones) you can make the most out of small investments.

You Are Starting Sooner 

Investing when you have little money means that you’re starting to invest sooner rather than later. When you start now, even small amounts of money put into the market can grow into legitimate sums of money as the years go by.

You Have Less to Lose 

Another great advantage of investing with little money is that there is less to lose. While it may sound like a lot of money and be painful at the moment, losing $500 isn’t going to dramatically change your life like losing a fortune would. Small investments will help you get comfortable with the ebbs and flows of the market and take small losses in stride.

You Can Learn The Ropes

If you don’t have much money to invest, you really need to wait for Rule #1 events that cause great companies to go on sale. It makes EVEN MORE sense to seek out great deals on companies because great deals are all you can afford. When you learn the skills to make great decisions on small investment ideas, you can apply them to big investment ideas later on.

Continue to Learn More Small Investment Strategies

Investing isn’t about just jumping in with $1,000 and it’s not about waiting until you have more to jump in with. It’s about finding wonderful businesses you want to own and finding the right time to buy them. With these small investment ideas, you can start right now whether you have $1000, $500, or $20 to invest.  

Follow the lead of the best investors and take the next step in your investing journey by continuing to learn more. 

If you want to learn all of the principles of Rule #1 investing and start making smart investing decisions, join me at my Live 3-Day Virtual Investing Workshop where you can work one-on-one with me and my team from the comfort of your home.